A close look at the private equity exit process

So much has been written about selling to private equity, but far less has been said about what happens when private equity sells. Education and preparation are two critical components that need to be part of the private equity exit process.

The fundamentals of the company need to be addressed and target investment returns should be shared with the leadership team. If these targets are achieved, it would be a triggering event for moving toward an exit.
The preferred investment timeline typically starts at five years.

But in full transparency, it can be shorter or longer depending on numerous factors. There needs to be clarity on management’s desire to continue with a new private equity partner or strategic buyer. Depending on that preference, it may lead the private equity firm to consider hiring future leaders that can be relied upon to guide the business into its next phase.

Understanding the management team’s financial goals is also important to guide partners through the myriad combinations of business growth, incentives and ownership and how that preferred financial outcome can potentially be achieved. Ideally, all shareholders’ personal, financial and professional goals line up in terms of probable outcome and timeline. Setting expectations early on is crucial to a smooth and successful transition in what could otherwise be a highly stressful event.

Get outside perspective
We all have blind spots. Bringing outside perspective into the conversation is vital, particularly in the latter few years of an investment. What can be done between now and the target exit quarter to maximize value? There are many different sources of information to consider, but the firm will often default to a particular investment bank that has expertise in an area or strategy that it wants to be perceived as being a part of.

If it’s a technology-enabled business service company with a road map to being a software company, the firm will want to gain the perspective of a software investment banker. This helps the management team as it begins to understand how the market will ultimately evaluate the business.

Process and preparation
Is your business transferable? Does it stand on its own or does it continue to rely on the founder for its success (hopefully the former)? Are your processes and technologies transferrable? Do you have documented processes and procedures, a technology road map and intellectual property protections?

What major concerns might potential buyers have and how can management address those concerns? Do you have a strong case to achieve the desired financial outcome? How would a potential buyer finance the acquisition? Is leverage available? Has a net proceeds (after taxes and transaction expenses) analysis been completed? Has a data site with expected due diligence requests been fully prepared?

The process of an institutional sale is comprehensive and this only scratches the surface of what considerations need to be made. Suffice it to say, the earlier you start the conversation, the better the outcome for all involved.

Jeffrey Kadlic is co-founder and managing partner at Evolution Capital Partners LLC